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John Kerry's healthcare proposal: budget-buster

By Kevin Gabriel
web posted March 22, 2004

John Kerry's Healthcare proposal is pretty much what one would expect. One might call it "Hillary Lite." There is an attempt to expand coverage and the government slides into the insurance business. It's designed to start us on the road to nationalized health care. After all, once the government gets involved in a business like this, they are sure to feel the need to exercise greater and greater control over time.

Employer coverage does not seem to be mandated but it is strongly encouraged and an attempt is made to entice them into providing more benefits. This is tied into the proposal that the government get into the business of providing 75 per cent of the insurance on all claims over $50,000. The Kerry people tell us that such claims constitute .4 per cent of the total number of claims and 20 per cent of total expenses. Such numbers are probably on the low side, but are not unrealistic. The resulting reduction in insurance premiums (since insurers will not need to charge for the part the government reimburses) is to be passed on to insureds, either through better benefits or reduced contributions. Employers will be required to demonstrate that this "savings" is indeed passed on. The proposal also pushes disease management programs, which, it claims, will significantly reduce costs.

Nothing in the proposal is said about how the government will pay for becoming the principal provider of what is typically referred to as "excess of loss" or "stop-loss" insurance. But, since all the Democrats can talk about these days is the state of the deficit, perhaps we ought to think about that.

Insurance companies and their actuaries spend a lot time working on just this kind of problem. And, for a $50,000 stop-loss cover, and assuming an inception date for such a program of 1/1/2006, a reasonable estimate of the average employee cost would be around $255 per month or $3062 per year. This assumes that the government does not alter the underlying basis of payment to physicians and hospitals. It also assumes that medical care trend (the rate of per capital increase in medical costs) stays roughly where it has been.

Now, there are something over 104,000,000 million households in the US, about 82.6 per cent of which involve those under 65. Let's assume that these are the only people John Kerry is talking about, even though there are some people over 65 who do work. They will come under Medicare. Further, let's assume that 15 per cent of the remaining families are covered under other government programs. Otherwise, let's assume that all employers choose to avail themselves of the program. The government would need over $160 billion to cover everyone. And that's just the first year! The amount will escalate very quickly, as we shall see.

Is this a fair number? I think so. It assumes the typical insured lives in an average location with average costs and that, across all industries, claims are constant. It also assumes that there are managed care contracts in force that hold down reimbursement rates. It assumes that it takes 20 per cent of costs to disseminate, manage, and oversee the program, a level slightly below what the typical excess carrier would assume.

The data used to compute these rates is based on a population of insureds. Thus, some underwriting is assumed. But, under the Kerry plan, there apparently will be no underwriting. Everyone will be covered. Actuarial literature would argue that the difference between an underwritten and a non-underwritten population is at least 10 per cent, perhaps substantially more. In this respect, the cost estimate is low.

But this work raises many questions, none of which are addressed by the Kerry proposal. They include the following:

  1. Why will Employers will even bother to enroll in the wonderful "premium rebate" plan? They won't gain anything, except to take on the chore of demonstrating to the government that they have indeed, "passed on" the savings to their employees.
  2. Currently, Employers have a strong interest in managing large claims because they are either directly on indirectly on the hook for them. For very large employers, like GM, which are completely self-insured, every dollar paid out on such claims comes from their coffers. For employers that are insured, they risk that large claims will result in higher rates next year. Now the government will be running the excess loss business. And they certainly won't be underwriting. One wonders if anyone will care what happens to a $50,000 claim.
  3. Passing the savings on to workers is more easily said than done and its effects may not be good for controlling costs. For example, it is not clear on how this policy would apply to those workers who already aren't paying anything for healthcare or pay very little. One would assume they will have to get more benefits. But that will only increase utilization. The result will be higher costs, not lower costs. In this respect, the Kerry proposal does nothing to address the fundamental problem with healthcare financing in the US – that everyone is spending someone else's money.
  4. The excess of loss business is subject to what actuaries refer to as "leveraged trend." What this means is that costs at high levels (and excess of $50,000 is certainly that) increase faster than costs at the original level. This isn't anything supernatural; it's simply the mathematical consequence of escalating costs. For example, if the cost of medical care is rising at 15 per cent per year, the rate of increase in costs at the $50,000 level is higher, more like 25 per cent-30 per cent. So that $160 billion number will rise by more than $40 billion in year two. If the current rate of increase in medical care costs were to persist, then the cost of program would approach $500 billion by 2010. The ten-year cost of the Kerry plan will be in the trillions.
  5. Many hospitals and Managed care networks actually charge a higher rate for large claims than they do for smaller ones. This policy, known as an "outlier" provision has caused insurers no end of headaches, as the excess of loss carriers do not get the benefit of favorable reimbursement rates at low dollar levels. What is the government going to do about these? Most likely they will outlaw them. So the hospitals will have to raise rates at the lower levels to make up for the lost revenue. And if they hospitals are not allowed to do that, then many of them will go out of business.
  6. Who is going to coordinate this program between the government and the Insurance industry? Are insurers supposed to pay the claims and get the 75 per cent from the government or is the government going to pay the claims directly? What about claims that insurers would now deny (due to misrepresentation, typically)? In all likelihood, they will no longer exist, since underwriting is likely to be non-existent under this plan. Is the government going to dictate what insurers can charge for their 25 per cent share of the excess claims? If so, they are likely to end up with 100 per cent of the coverage whether they want it or not.
  7. At what rate is the government going to reimburse its share of the excess claims? Are they going to use the rates paid by insurers? Or are they going to dictate their own rates, perhaps by employing what exists for Medicare? Most likely, once they see the cost of this boondoggle, they will mandate that everyone accept Medicare rates. In case you've forgotten, those are the rates that are so low that many physicians won't accept Medicare patients.
  8. What is the government going to do about plans that are capitated, such as HMOs? In these plans members pay a monthly fee and their services are covered. There are no bills that accumulate to $50,000. Providing such cover (Known in the business as HMO Excess or Provider Excess) is a complex process. Who is going to be responsible for this?

But the biggest problem remains the cost. Just where are we going to get the money? By repealing the Bush tax cut, a good portion of which hasn't even happened yet? I don't think so.

The Kerry proposal puts a lot of emphasis on cost control. They act like these concepts have just fallen from the sky. But insurers and employers are already hard at work on these programs. They're not interested in losing money or seeing medical costs spiral either. And as for disease management programs, these are for controlling costs on chronic medical conditions, such as diabetes or asthma. Those conditions run up costs, but generally not at the $50,000 level. Large individual claims come from things like premature births, burns, cancers, and so on – matters that are catastrophic and not always predictable.

The implication of the Kerry plan is that we are going to do so many wonderful things to save money that this foray into the insurance business will pay for itself. This is the typical Democratic slant on any program with which they are attempting to buy votes: we can all get something for nothing.

John Kerry wants to put the government in the health insurance business. But, he obviously has no clue about how that business operates. And he hasn't given even a moment's thought to the cost. When it comes down to it, the Kerry Healthcare proposal is not only irresponsible, it is incompetent.

Kevin Gabriel is a consultant and writer who lives in Boston. He works extensively in the healthcare industry.

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